Transition from mining a 'nail biter'

Business Reporter

Home construction has been slow to respond to rate cuts. Photo: Tamara Voninski

The transition away from mining-led growth towards other sectors such as building construction is expected to be "uncomfortably slow" and a "real nail biter", industry researcher BIS Shrapnel says in a new report.

The forecaster said total national building commencements was expected to grow at 3 per cent in the 2013-14 financial year and a further 3 per cent in 2014-15.

Home building has been punching below its weight and normally low mortgage rates would be stimulating the sector toward clear recovery by now.

Home construction in particular was seen as not responding to lower interest rates as was expected, BIS Shrapnel said today.

"Home building has been punching below its weight and normally low mortgage rates would be stimulating the sector toward clear recovery by now. But the antibiotics are taking longer to work this time around,” said BIS Shrapnel's associate director Kim Hawtrey.

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"High household debt, concerns about the global economy, planning restrictions in some states and lack of land supply are among the factors that explain this new phenomenon."

Housing growth was expected to be uneven across states. NSW, Queensland and WA were expected to see an improvement in their residential construction outlooks, while Victoria and other southern states were forecast to experience a contraction, the report said.

The mixed forecasts were expected to see dwelling starts fall by minus 2 per cent in 2013-14, before there is growth of 9 per cent in 2014-15 and 4 per cent in 2015-16, the report added.

"This will be on the back of low interest rates, strong population growth and pent up demand in key states," BIS Shrapnel said. "The lower Australian dollar - compared with recent years - will help stimulate traditional industries. The lower construction prior to 2013, as well as an expected improvement in confidence and income growth, will underpin the outlook."

In contrast, non-residential building construction is forecast to be stronger, growing 7 per cent in 2013-14 at about $33.5 billion.

Monetary policy 'not causing turnaround in domestic demand'

Domestic demand was also not been sufficiently boosted by the current interest rate easing cycle, Citi economists said in a research note ahead of next week's Reserve Bank board meeting.

"Our own barometer of economic conditions (pictured) has deteriorated over the past three months," the economists Paul Brennan, Josh Williamson and Vivian Jiang said.

"On our measure, business and consumer confidence has weakened, as too house prices. These indicators now sit in the lower half of our quadrant diagram with a number of other important activity indicators.

"The conclusion we draw from this picture of the economy is that monetary policy has yet to promote a turnaround in domestic expenditure."

Slowing China could lower Australian growth

The reports came as external factors weighed on Australia's economy.

Japan's largest broker Nomura has released a particularly gloomy forecast, saying weaker growth in China could shave up to 0.7 percentage points off the local economy

The Australian economy could experience any slowdown in Chinese growth through either a hit to direct trade or as a terms-of-trade shock from lower commodity prices.

In terms of direct trade, the Australian economy could shrink by about 0.3 percentage points, Nomura analyst Charles St Arnaud said in the report. China takes in about 75 per cent of all of Australia's iron ore exports and 23 per cent of its coal exports.

The impact of a slower China on Asia could also seen Australia's GDP weaken by a further 0.1 percentage point.

In relation to the terms of trade, and lower commodity prices, Australia's growth could soften by about 0.3 percentage points. This adds up to a total of about 0.7 percentage points.

Nomura is currently forecasting that Australia's base case for growth next year is about 2.1 per cent, which is at the low end of economist predictions. A 0.7-percentage-point could thus see GDP at about 1.4 per cent, the weakest growth since the financial crisis.

At the same time, a weaker Chinese economy is expected to push the Australian dollar lower, while interest rates could be slashed by a further 25 basis points on top of Nomura's current forecast of a further easing of 50 basis points in the current easing cycle.